All Bets Off? Germany Rejects Greek Proposal for Modified Loan Extension

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Amid a rapid and still-unfolding set of developments on Thursday in Europe, the German government of Chancellor Angela Merkel rejected the contents of an application submitted by the newly-elected Syriza government of Greece earlier in the day, saying the proposal for a loan extension does not fulfill the demands made by the austerity-ridden bailout program agreed to by the previous Greek government.

According to a statement released by Martin Jaeger, a spokesman for the German finance ministry, "The letter from Athens is not a proposal that leads to a substantial solution. In truth it goes in the direction of a bridge financing, without fulfilling the demands of the program. The letter does not meet the criteria agreed by the Eurogroup on Monday."

Germany's response came in reaction to a carefully-worded letter submitted to the Eurogroup by Greek finance minister Yanis Varoufakis earlier in the day in which he stated his country would officially submit for an extension of the loan agreement, offering some concessions while working towards a new long-term agreement designed "to restore the living standards of millions of Greek citizens through sustainable economic growth, gainful employment and social cohesion."

Putting the loan application in context, Varoufakis wrote:

Over the last five years, the people of Greece have exerted remarkable efforts in economic adjustment. The new government is committed to a broader and deeper reform process aimed at durably improving growth and employment prospects, achieving debt sustainability and financial stability, enhancing social fairness and mitigating the significant social cost of the ongoing crisis.

The Greek authorities recognise that the procedures agreed by the previous governments were interrupted by the recent presidential and general elections and that, as a result, several of the technical arrangements have been invalidated. The Greek authorities honour Greece's financial obligations to all its creditors as well as state our intention to cooperate with our partners in order to avert technical impediments in the context of the Master Facility Agreement which we recognise as binding vis-a-vis its financial and procedural content.

In this context, the Greek authorities are now applying for the extension of the Master Financial Assistance Facility Agreement for a period of six months from its termination during which period we shall proceed jointly, and making best use of given flexibility in the current arrangement, toward its successful conclusion and review on the basis of the proposals of, on the one hand, the Greek government and, on the other, the institutions.

Just prior to Germany's reaction to the letter was released, Margaritis Schinas, a spokesperson for European Commission, said the Greek letter could be the basis for a "reasonable compromise" and forward movement on an agreement.

As the BBC reports:

The Greek request letter includes a pledge to maintain "fiscal balance" for a six-month period, while it negotiates with eurozone partners over long-term growth and debt reduction.

The Greek government was also reported as saying that its extension proposal was in order to give Athens enough time, without the threat of "blackmail and time deficits", to draw up a new agreement with Europe for growth over the next four years.

Many outlets reporting the Greek proposal as marking a compromise position by Varoufakis and Prime Minister Alexis Tsipras, though it appears the application attempts to make the overall distinction that Greek officials have made in recent days, which is that the loan agreement is de facto a separate document than the bailout program to which it is attached. As one Greek government official toldReuters, the letter from Varoufakis was acccompanied by an official request to extend to its the loan agreement. "However," the news agency reports, "[the official] insisted the government was proposing different terms from its current bailout obligations."

That line conforms to statements made by Tsipras during a speech before Greek parliament on Tuesday, but also appears to be the exact content of the proposal which Germany has now rejected.

"We are working hard for an honest and mutually beneficial deal, a deal without austerity, without the bailout which has destroyed Greece in recent years," Tsipras said during the speech. Though he said the deal would seek to remove "the toxic presence of the Troika," it appears from Varoufakis' letter that allowing Troika auditors to remain in place is one of the points which Greece may be willing to allow, at least in the short-term.

Following the announcement of the Greek application, president of the Eurogroup, Dutch finance minister Jeroen Dijsselbloem, announced an emergency meeting would be held in Brussels on Friday to vote on the proposal.

It's possible that Germany's current refusal could be altered if enough of the other ministers push to accept the Greek application, though at this point the outcome is anything but certain.